Define and Compare Gross Settlement versus Net Settlement in the Context of Derivatives

Gross settlement means each individual transaction is settled separately, requiring the full transfer of funds and assets for every trade. Net settlement, conversely, aggregates all obligations between two parties (bilateral) or multiple parties (multilateral) over a period, and only the resulting net balance is transferred.

Net settlement is significantly more capital efficient and reduces the number of transactions, but it concentrates risk until the final net amount is settled. Derivatives are often net-settled via a clearing house.